Economic Survey: downturn more or less over

Claiming that the "downturn is more or less over", the pre-Budget Economic Survey on Wednesday projected an optimistic 6.1 to 6.7% growth in the next fiscal and made a strong call for cutting subsidises.

While pegging the GDP growth at an estimated 5% for the current fiscal, the Survey tabled in Parliament by finance minister P Chidambaram said "...the overall economy is expected to grow in the range of 6.1 to 6.7% in 2013-14" as the economy is looking up.

"Controlling the expenditure on subsidies will be crucial. The domestic prices of petroleum products, particularly diesel and LPG need to be raised in line with their prices prevailing in the international market," the Survey said.

It noted that a beginning has already been made with the decision in September last to raise the price of diesel and again in January to allow oil marketing companies to increase prices in small increments at regular intervals. The number of subsidised gas cylinders has also been capped at 9 per household.

Predicting that the headline inflation will decline to between 6.2 and 6.6% by next month, the Survey said that elevated food inflation would continue to remain an area of concern as it inched towards double digit in December 2012.

The Survey emphasised that efforts will have to be made to contain subsidies through better targeting and for reducing leakages involved in their delivery. One such initiative is direct benefit transfer (DBT) scheme.

It said the government has been calibrating pricing policies to addressing the issue of burgeoning fertiliser subsidy and underlined the need for according priority to food subsidy in view of the under consumption of basic food by the poor and the extant of malnutrition.

The government has sought to correct this through National Food Security Act though concerns have been expressed that this would lead to a higher subsidy outgo.

"However, it is a part of the challenge of prioritisation to provide for this basic need even as other items of expenditure are minimised," the Survey said.

The Survey said while India's recent slowdown is partially rooted in external causes, domestic causes are alsoimportant.

The strong post-financial-crisis stimulus led to stronger growth in 2009-10 and 2010-11. However, the boost to consumption, coupled with supply side constraints, led to higher inflation. Monetary policy was tightened even as external headwinds to growth increased.

The consequent slowdown, especially in 2012-13, has been across the board, with no sector of the economy unaffected. Falling savings without a commensurate fall in aggregate investment have led to a widening current account deficit.

Wholesale price indexed inflation (WPI) has been coming down in recent month. However, food inflation, after a brief slowdown, continues to be higher than overall inflation. Given the higher weightage to food in consumer price indices, CPI inflation has remained close to double digits.

Another consequence of slowdown has been lower than targeted tax and non-tax revenues. With the subsidies bill, particularly that of petroleum products, increasing, the danger that fiscal targets would be breached substantially became very real in the current year, the Survey said.

"The situation warranted urgent steps to reduce government spending so as to contain inflation. Also required were steps to facilitate corporate and infrastructure investment so as to ease supply.

"Several measures announced in recent months are aimed at restoring the fiscal health of the government and shrinking the CAD as also improving the growth rate. With the global economy also likely to recover somewhat in 2013, these measures should help in improving the Indian economy's outlook for 2013-14," it said.

The economy is projected to grow at 5% in current fiscal, the lowest in a decade. It was 6.2 per cent in 2011-12 and 9.3% a year ago.

The projections of 6.1 to 6.7% growth next fiscal takes into account normal monsoon, moderation in inflation rate and mild recovery in global growth.

"While India's recent slowdown is partly rooted in external causes, domestic causes are also important," it said, adding boost to consumption coupled with supply side constraints led to higher inflation.

It said the growth story is unlikely to get support from the global economic developments and would remain tied to movement in international oil prices.

Chief Economic Advisor Raghuram G Rajan in his introduction to the Survey said: "These are difficult times, but India has navigated such times before, and with good policies it will come through stronger."

Rajan prescribed shifting national spending from consumption to investment, removing the bottlenecks to investment, growth and job creation, besides making efforts to reduce cost of funds.

Easy money policy of major developed and developing nations could aggravate inflationary expectations in India, cautioned Economic Survey for 2012-13.

"The positive effect of continuous policy easing by the major advanced and developing countries could pose a higher risk to inflation expectations and may be considered as an upside risk to inflation forecast," said the Survey.

"Inflation has eased in almost all major advanced and emerging market economies in the current year," it said.

India has lost about 10% share of the global BPO market in the last five years to destinations like China, the Philippines and Brazil, raising concerns for the USD 20-billion Indian BPO industry.

The pre-budget Economic Survey 2012-13, which was tabled in Parliament today, said India faces stiff competition from several emerging countries in the BPO sector.

It called for information campaigns by the industry to dispel the myths and fears about outsourcing in the developed economies.

Countries like Malaysia, China and the Philippines in Asia; Egypt and Morocco in North Africa; Brazil, Mexico, Chile and Columbia in Latin America; and Poland and Ireland in Europe are emerging as attractive destinations for voice contracts, posing a significant threat to Indian firms, it said.

Amid debate over imposing higher taxes on super-rich, the Economic Survey today said efforts should be made to raise revenue by widening tax base and not by increasing the rates.

"It is much better to achieve a higher tax-GDP ratio by broadening the base which is taxed rather than increasing marginal tax rates significantly -- higher and higher tax rates impinge more and more on incentives to undertake taxable activity, while encouraging tax evasion," it said.

Several experts, including PMEAC Chairman C Rangarajan, have pitched for higher rates of taxes on super-rich.

India's financial sector faces certain challenges that hold it back from becoming a preferred destination for global investors even though reforms have made domestic capital market more vibrant and transparent, the Economic Survey said today.

The performance of domestic financial sector will depend on both short term and long term factors such as risk perception of investors, said the Economic Survey for 2012-13 tabled in Parliament.

"...there are still certain challenges in the development of the Indian financial sector which need to be addressed to make it an important avenue for productive channelisation of savings by domestic investors and a preferred investment destination for international investors," it said.